Central Public Sector Enterprises

Performance Linked Incentive Schemes, Employees Stock Option Scheme and Enterprise specific implementation models

Annex 2.2.1 2.5.1

A. Central Public Sector Enterprises (CPSE) - Performance Linked Incentive Scheme 1. The High Level Pay Revision Committee headed by Justice S. Mohan had recommended that payments over and above the ceiling of 50% of basic pay should be entirely in the nature of performance related pay. These performances related payments should be a function of profitability at the level of a particular enterprise and emoluments at the level of the individual executive. The Committee believed that some norms would be desirable and suggested that such performance related payments should not, as a norm, exceed 5% of the distributable profits of the enterprise. Accordingly DPE OM No2 (49))/98-DPE (WC) dated 25-6-1999 lays down this principle with power of implementation being vested in the Board of Directors. The OM provides that “Payment of perquisites and allowances may be upto a maximum of 50 per cent of the basic pay, payments over and above the ceiling of 50 per cent should be entirely in the nature of Performance Related Payments which should not exceed 5 per cent of the distributable profits in an enterprise.” 2. The distributable profit is arrived as below: “Distributable profit represents the profit after tax and providing for transfer to Statutory Reserves such as Foreign Project Reserve, Investment Allowance Reserve, General Reserve (u/s 205 2A of the Companies Act) etc.” (DPE OM No 2(49)/98-DPE (WC) GLXXIX dated 12-9-2000). B. CPSE - Employees Stock Option Scheme (ESOS) 3. The ESOS offers holding shares to employees. The beneficiaries of the Trust are regular employees of the company who voluntarily contribute to the scheme by investing their savings in the share and other instruments of the company. Each beneficiary may contribute each financial year to the trust a sum not exceeding 1/6th of his annual pay plus DA. The Trustees distribute to the beneficiaries the net earnings in proportion to the beneficiary certificate(s) held by the beneficiary during the year. The Trust normally has an independent existence, an arm’s length relationship with management as well as the labour in terms of professional decision making. This scheme is applicable to all cases of disinvestment or fresh issue of equity by the enterprises and is subject to provision of Company Law and SEBI guidelines as applicable from time to time. (OM No: DPE/11(55)/97-Fin. Dated 28-1-1998)


CPSE – Enterprise specific implementation models 4. additional performance related incentives were given in the form of extra incentive payment. A set of targets were mutually agreed upon for the grant of incentives on the Barh project which comprised of major milestones that NTPC wanted to achieve in a given time-frame. NTPC has been successfully implementing performance related incentive schemes for some time. Generation Incentive 100% Group-B-II a) Common Services Employees [Excluding Project Construction Employees as given below (b)] b) Project Construction Employees (Civil Construction & Equipment erection) 60% of Group-A 50% of Group – B-II(a) i. Incentive admissible as per performance – payment matrix. Project Iincentives (PI) were also coupled with generation incentives to incentivize the start of generation and achieve efficiencies in generation. The NTPC experience shows that productivity rise is the highest when all direct and indirect employees are integrated in an incentive scheme which leads to collective collaboration. incentive and Generation Incentive will not exceed the amount payable to Group-A employees. if the project was completed one month before schedule.50% of the basic pay if the project was completed two months ahead of schedule. The first Performance Linked Incentive project discussed is the “Project Construction Incentive Scheme of National Thermal Power Corporation (NTPC) for Barh (3x660 MW) Plant”. The entitlement was as per categories of employees. 25% of Project Incentive applicable to project construction employees as at Group-B-II(b) subject to the condition that sum total of Project Const. Table 1 Details of project incentives Group / Category Group – A (O&M Employees) Project Incentive 25 % of Project Incentive applicable to project construction employees as at Group B-II(b) subject to the condition that sum total of Project Construction incentive and generation Incentive (excluding Sp.e.C. Thus. subject to the condition that total payment including Generation Incentive does not exceed the limits provided for. However. The incentive plan decided for the Barh project was group based in order to foster team spirit and create a cohesive environment essential for producing quick results. Oil Incentive) does not exceed 25% of basic pay. The overall limit to PI was capped at 25% of the annual basic pay.25% of the basic pay. and to 27. if the project was completed ahead of the planned schedule. 30% of group-A 45 . PI cap was raised to 26.

00 to 1. which can be distributed to all the employees. d) Payout on individual performance is based on the scores obtained by the individual in the normal performance appraisal. combined in ratio of 80:20.50 1. KPIs. b) For the Team performance incentive component.99 0. c) The earlier scheme (prior to 2004/05) had only Team performance component where the maximum payout under Team Performance with 100% target achievement was 15%.0% 1. c) 46 .5% Payment of incentive at the existing levels under PLI is guaranteed for every employee in case MOU score is more than a preset standard. weightages and targets has been introduced. i) Productivity Incentive Scheme (PIS) a) PIS system has both team performance and individual performance. For lower achievements. ii) Performance Linked incentive (PLI) a) The PLI continues to be linked to the performance against annual corporate MOU targets. The distributable profit allocated is divided by the total pay (BP+DA) to arrive at the percentage of the individual of the individual base pay. The above percentages have been worked out after considering Indian Oil’s profitability. the constitution of teams and performance parameters for each team are based on business needs.e. e) The individual scores on Key Performance Indicators (KPIs) from the Performance management system are on a scale of 1 to 5.25 2.26 to 1.0% 1. the Productivity Incentive Scheme (PIS) and Performance Linked Incentive (PLI). the percentage gets reduced according to the parameters. KRAs. With the team performance and individual performance in the ratio of 80:20. against which the corresponding payout will be determined.76 to 1.5% 1.5. The team performance incentive for achieving 100% targets has been pegged at maximum of 12% (80% of 15%). a robust performance management system with defined roles. The second example is the experience of the “Indian Oil Corporation” with performance based reward schemes. b) The MOU rating slabs and percentage of distributable profits to be allocated against each slab have been revised as outlined below.75 1. Indian Oil Corporation operates two schemes i. f) For successful implementation of individual performance based incentive scheme.51 to 1. Table 2 MOU Rating with Percentage Distribution MOU Rating Percentage of distributable profits allocated 1.

performance payment is computed as if the salary or wage were Rs 4000/.per month. The quantum of payment is computed as a percentage of wage (Basic pay + DA) subject to the condition that where an employee’s wage/salary exceeds Rs 4000/. base year weightage will be 1 sub to max. of NCR w. The scheme covers all shore based employees of SCI and is administered on the basis of organization's performance and individual measure. 6. this will be converted to base of 100. The performance against the various indices is evaluated quarterly on cumulative basis but the payment in respect of the four quarters is made at the end of the year. weightage of 5 for 30% and above reduction in No of NCRs Weightage 100 2 Delivery Performance & Project Completion 15 3 Quality Performance 5 120* * For the purpose of computation of % achievement.d) The increase benefits are not admissible to officers and workmen who are rated less than ‘Satisfactory’ in their annual performance appraisals. e) The incentive payments allocated under PIS & PLI put together does not exceed 5% of the distributable profits in a financial year. including temporary and casual employees and trainees. The third example is the experience of the “Bharat Heavy Electricals Limited” (BHEL) with Plant Performance Payment Scheme (PPPS) and Performance Linked Incentive Scheme.per month. The scheme at BHEL covers all categories of employees.r. Eligibility criteria of Performance Related Incentive Payment at SCI are as under: 47 . The BHEL PPPS was introduced during 1973-74 to rationalize and replace the diverse production incentive schemes in vogue in the various units. 7. The fourth example is the experience of “The Shipping Corporation of India Limited” (SCI). The formula used for evaluation of the performance of the units and the scheme of payment for the same is given below: Table 3 Evaluation of Performance 1 Indices Physical Completion Formula Actual Physical Completion Budgeted Physical Completion Actual milestone/important supplies completion during the Quarter (planned Milestone) Important supplies completion during the quarter For every 6% reduction in No.t. Such employees are entitled to receive the amount as per existing (old) scheme.

iii.25 < 7. iv. (Source: Inputs from Department of Public Enterprise’s Letter DO No. 3rd component comprising of the remaining 40% of incentive is payable with reference to ACR for the financial year under consideration. In case of leave without pay.75 80% ≥ 7. Employees who have an unblemished record during financial year (no penalties) will be only entitled for the incentive for that particular year ii. attendance records and ACR rating for the period. The ACR scheme and incentives are paid in following manner: i. Employees who have been dismissed/discharged or terminated from the service shall not be entitled for incentive iii.25 < 8. covering group performance.5 65% ≥ 7. and Parameters for Performance-Related Incentives (PRI) in Government’.t. Employees under suspension shall not be entitled for the incentive payment until and unless proved not guilty and suspension order is revoked. Principles. certain checks and balances have been proposed in the scheme.r. 2007 and IIM Ahmedabad ‘Synthesis Report on Formulating the Concept. 2(40)/06-DPE(WC) dated 26th March. the individual’s payment will be worked out onthe basis of parameters.00 0% c) In addition. Table 4 Scheme of payment (II) Excellent 100% Very Good 90% Good 70% Fair 40% Poor Nil 1st component comprising of 20% incentive amount will be payable to all shore employees 2nd component comprising of 40% incentive shall be payable with reference to attendance. there will be pro-rata deduction of the payable PRI. i. Table 5 Percentage Payable w.75 < 8.00 85% ≥ 7.50 < 7.) 48 .25 90% ≥ 7. ii.5 100 % ≥ 8.5 95% ≥ 8.00 < 7. ACR Average ACR Average (out of 10) % Payable ≥ 8.a) Actual distribution not to exceed 5 % of distributable profit as defined by Department of Public Enterprises for one year b) While implementing the scheme.25 50% < 7.00 < 8.